Happy New Year!
During December, the paper portfolio continued to outperform the S&P500 by 0.99%. Similar to previous months, the performance of the underlying stocks continue to be dragged by the significant allocation to cash (~28% at the beginning of the month). Excluding cash, the stock-only portion of the portfolio outperformed the S&P500 by 2.23%.
With the strong performance over the last two months, the stock-only portion of the portfolio is now outperforming the S&P500 since inception in July 2019. The paper portfolio as a whole, however, remain behind the index by 1.6%.
The timing of the launch of the portfolio has not been ideal. While the large cash allocation helped the portfolio weather the bouts of volatility in August and September, the cash drag has been enormous in the overall up-market experienced in 2H19. I am quite happy to even be close to the S&P500 as we close out the year given the cash drag. But the bigger picture remains the same – The companies held in the paper portfolio are creating value significantly faster than the S&P500. This portfolio should meaningfully outperform the S&P500 over the long term.
During the month, most of the stocks performed exceptionally well likely due to the Phase One trade truce. With the trade war on hold, confidence is strengthening the market, which is benefitting most of the stocks in the portfolio.
On the winning side, the only stock that requires a call-out is Match. Match shares increased by 16.5% during the month, largely as a result of greater clarity around the share distribution/spin off. The vast majority of Match stock is held by parent-co/media conglomerate IAC. IAC previously announced plans to spin off assets (of which Match is the largest). IAC finally announced details on 12/19 regarding the spin off, which would effectively distribute Match shares to IAC shareholders in a tax-free transaction.
In terms of rebalancing of existing positions, most of the changes are minor except for SQ and UBER. SQ declined 9.5% in the month likely as a result of tax loss selling given the weak performance of the shares for most of the year. I don’t think the weakness is warranted by fundamentals. The shares should rebound in 2020. I continue to find UBER to be quite undervalued relative to the platform potential they have. The shares have held up quite well despite Travis Kalanick’s sale of >$2 billion of stock. I think UBER shares should perform better in 2020.
I have added Align Technologies (ALGN), Pinterest (PINS), and Slack (WORK) to the portfolio:
Align – Align Technologies is the leading maker of invisible/clear aligners globally. These aligners are used to give patients the perfect smile and is highly disruptive vs traditional braces. Not only are aligners less painful, they are less intrusive for patients (can be removed and generally not visible at a distance). Like travel, healthy lifestyle, “experiences over product”, etc, millennials globally are increasingly demanding perfect smiles. ALGN is the best positioned to capture this global megatrend. Similar to cosmetics demand, aligners should prove to be quite resilient regardless of the macro environment.
Pinterest – Like UBER, I think this is likely one of the more controversial stocks in the portfolio. Pinterest offers essentially a scrapbook app that allows users to collect pins (photos) of things of interest. PINS already has a few hundred million users (mostly females) that largely use it to brainstorm ideas around areas like furniture, housing renovation, food, etc. The long-term risk is that social networks all get subsumed by Facebook (or whatever the future dominant social network will be) and hence PINS might not exist in 10 years. However, while PINS is a social product, its key value proposition is not first and foremost as a social network. It is an organization/discovery tool. Hence I think PINS niche is likely more defensible than investors expect. Offsetting the risk, PINS has a very nice funnel of potential ecommerce buyers. PINS is increasingly positioning themselves as an ecommerce platform with shoppable pins not unlike what Instagram is doing. I think for this potential, a small starter position in PINS makes sense.
Slack – Slack makes chat software that has taken enterprises by storm. Increasingly, it is clear that email is broken. While many start-ups/companies are trying to “fix” email, Slack is reorienting communication around chats instead of email. This is potentially very disruptive over the long-term. However, the media has not been kind to Slack over the past few months. Not only was it partially linked to Softbank drama (Softbank was a key pre-IPO investor), it has also come under aggressive scrutiny due to Microsoft’s very public statements about the success of Microsoft Teams (a competing product). The ever-brilliant Ben Thompson at Stratechery wrote a great post discussing Microsoft and Slack. Ultimately, while competition is concerning, chat software involves network effects. And these effects will likely strengthen over time. Slack is not only solidifying its presence within existing clients, it is strengthening the network by creating linkages across companies through “Shared Channels”. There are many different ways to do business, and for that reason, the market should be large enough to support multiple different players pursuing multiple different products/strategies.
Disclosures: I own shares in SE, BABA, ATVI, MTCH, SHOP, SQ, TCEHY, and UBER. I have no intention to transaction in any shares mentioned in the next 48 hours.